Negotiating a commercial lease can be complex. Whether you are a landlord or tenant of commercial premises, it is extremely important that the insurance provisions are fully detailed in the lease agreement. Landlords and tenants should always ensure that their lease requirements clearly articulate what insurance is required. Clear and unambiguous language will help reduce the risk of liability.

The following are important insurance provisions to always include in a commercial lease:

1: Who is responsible for insuring what?
Commercial leases should have well-written insurance provisions that clearly state each party’s insurance obligation. For example, a lease should contain clauses such as: “Tenant is responsible for insuring their personal property and leasehold improvements. Landlord is responsible for insuring the building.” Depending on the particular nature of the business’ operations, it is important that the provisions address each party’s responsibility in relation to specific property. This will help reduce exposure and prevent gaps in coverage in the event of a loss.

2: Insurance requirements of both parties
Many leases provide insurance requirements for tenants only, however this could lead to significant exposure if the landlord does not also purchase sufficient insurance. It is important for the lease to require both parties to obtain property insurance, and other relevant insurance policies, in order to limit exposure to liability.

Further, the lease should define who is responsible for which areas of the building and each party should name the other as an additional insured on their policy. This helps minimize the problems associated with determining specifically who and what is covered under both parties’ insurance policies, and it prevents tenants from using insurance proceeds for purposes other than what the lease contemplates.

For example, if an employee slips and falls in the tenant’s space, the lease allows the landlord to tender any lawsuits filed against them to the tenant’s insurance company. This is made possible because the landlord is required to be named as an additional insured on the tenant’s insurance policy. The landlord should also be required to add the tenant as an additional insured on the landlord’s general liability policy; this will ensure the tenant is indemnified for claims arising out of areas for which the landlord is responsible to maintain.

3. Leasehold Improvements and Betterments
The lease agreement should address the possibility of leasehold improvements and betterments. Leasehold improvements and betterments are alterations, installations or additions made to a location in order to accommodate the needs of a tenant. It is common for landlords to insure the building, while the tenants insure their leasehold improvements. In this event, it is important for tenants to obtain insurance to cover leasehold improvements, and not just for personal property only.

5. Waiver of Subrogation Provision
Subrogation enables an insurer who has paid out a claim to attempt to recover that payment from from a third party by suing in the name of the insured. Subrogation provisions are often included in property insurance policies.

However, in a commercial lease, it is critical to obtain a waiver of subrogation provision in the lease agreement; this provision benefits both the landlord and the tenant. In a waiver of subrogation clause, a claimant effectively waives its rights to pursue a claim made against a responsible party. In effect, the parties expressly prohibit their respective insurers from pursing reimbursement from the party responsible for causing a loss, if a loss occurs. If this provision is not included, a carrier can blame and sue the landlord in order to recover the proceeds needed to re-build an entire building.

6. Abatement Provision
Abatement clauses in lease agreements provide tenants with the right or process of reducing the amount of rent in certain circumstances. Generally, this occurs when the building is uninhabitable or condemned for more than 30 to 90 days. It is important to address this issue because this impacts the amount of business interruption insurance a company may need to purchase. For obvious reasons, a tenant should negotiate this aspect of the lease so that a tenant can withhold rent for a landlord’s failure to provide basic services and the like.

Commercial leasing can be complex and involve a significant amount of negotiation between multiple parties. It is important to have an attorney analyze your specific situation and the particularities of your business to ensure you are adequately covered.

Ivo Labar and Dan Veroff are trial attorneys at Kerr & Wagstaffe LLP specializing in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page.